Analysis: We Should Rethink Who Funds Basic Services
Wealthy Barrington, Rhode Island, and needy Providence provide a case in point.
Barrington may be the only community in Rhode Island that not only did not cut back on library hours and services in 2011—it expanded them. What’s more, in 2012, it has continued to increase library funding.
The nearby city of Providence closed seven of its nine public libraries for a week this September because it needed to close a budget shortfall. Even before that closure, budget constraints had limited the hours at Providence libraries, making it difficult for people with full time jobs and their families to use this public service on most days.
This is just one example of how Providence and Barrington, located just nine miles apart, highlight the inequity of our locality-based budget system: The places most critically in need of the local services that facilitate economic growth and job attainment are the least likely to have the means to pay for them.
Rhode Island has 39 cities, each of which manages critical services (such as schools, public health, the promotion of tourism and business development, and law enforcement) needed for economic growth. As with most local governments in the U.S., the only taxation authority these cities have is a broadly defined property tax that covers houses, cars, boats, etc. (Such taxes make up 72 percent of Providence’s total revenue. Only 15 percent of the city’s revenue is funding from the state and the rest is made up of fees for services and the like). These sorts of “flat” taxes based on ownership are the norm for local governments across the country, with only a few exceptions.
A “flat tax” often seems like the most fair—everyone pays the same, based on how much they spend or own. However, in an era of unprecedented economic segregation, having a flat tax and fee system that is geographically limited to the local jurisdiction means that those cities and towns that are home to the poorest individuals (and, more importantly, have the lowest housing values) have the least ability to pay for vital services, let alone invest in the economic growth of the citizenry. Providence’s property tax rate is already three times that of cities in the rest of the state, and yet it still can’t generate the income needed to invest in essential services. Tying the funding for basic services to the locally available dollars is a perfect way to create inequality and stunt economic growth.
In Providence, where I live, the median household income is about $37,000. In Barrington, it is more than $90,000. Housing values mirror the money residents have at their disposal, and as a result Barrington can afford to invest heavily in all sorts of programs that benefit residents and the local (and national) economy.
Providence, on the other hand, is facing a dire revenue shortfall and has taken drastic measures to save money, providing only basic services to those in need. In one particularly rash move, the mayor fired every teacher in the city’s school system at the end of the 2010-11 school year so that he could hire back only as many as the city could afford (once they figured out how many that was). In the end, the city cut its education budget by about $28 million. The mayor closed six schools, eliminated scores of teaching and administrative positions, and substantially reduced the special-education budget. Because its property tax is already so high and its housing market is in continual decline, there are no good ways for Providence to increase its revenue. Providence has raised taxes several times over the last few years, but there is a limit to how much it can boost the property tax without hurting housing values even more. In time, the city may have to file for bankruptcy. And yet Barrington’s proposed budget for next year includes increasing expenditures on its schools by 2.7 percent (more than $1 million) without any tax hikes. Sure, these cities are also different in other ways, but those distinctions are irrelevant as long as their access to economic capital is so drastically different.
Most of us probably can think of two such contrasting cities within 20 miles of our own homes—one flush in cash with great services and another serving a poor population whose services seem to be forever under fire. The services cities need to provide—and how much is budgeted for each service—depend largely upon the population that lives there.
But wealthy or poor, people always seem to think that governments serving poor populations are somehow screwing up; few recognize that communities that are poor or have significant economic inequality (like Providence) are simply being screwed. When I talk to my neighbors and colleagues about the future of Providence, and how its growth is likely being crushed by the decisions of our political leadership, they often look puzzled. “Whatever it takes to balance the budget … the city has to manage its pocketbook,” they say—canned responses that could have been taken right from one of the mayor’s press releases. The thing is, they are right. Cities must balance their budgets or declare bankruptcy, as more and more of them are doing.
Because they have to fix their budgets using only the economic means available locally, the cities that need to spend the most on critical services to facilitate growth end up spending the least. Indeed, Paul Peterson, director of the Program on Education Policy and Governance at Harvard University, has found that communities with higher per-capita income spend more on welfare, health, education, unemployment benefits, and police, and fire—even though they need fewer of these services in the first place. What affects expenditures is not what a community needs to spend, but how much money it has available.
Economist Charles Tiebout is known for originating the concept of voting with one’s feet. Fifty years ago, he argued that officials at the local level know what services voters want and how much they’re willing to pay for them (i.e., taxes) by their willingness to live in a particular place. This concept is the cornerstone of competitive federalism: communities compete for residents, so they are driven to provide the best services for the least money.
His theory assumes a fictional utopia. The residents of Barrington were able to make these decisions and to buy expensive houses, the taxes on which guarantee good services. The people of Providence who would most benefit from high-quality schools, police officers on every corner, and access to great opportunities for job training lack the financial means to relocate to where those services are available.
Unfortunately, in tough economic times, states tend to pawn off more responsibilities to local governments, which exacerbates the opportunity gap between poor and rich communities and slow economic growth. It is large government entities—like states and the federal government that have the ability to distribute money in a way that makes up for local deficits. Maybe it’s time to rethink which level of government should pay for services that lead to economic growth.